Up, But Not Way Up

Last year, the San Diego economy did poorly, although it was picking up a bit in the final several months. This year, it should do moderately better. Alan Gin, economist at the University of San Diego, says the U.S. economy will grow by about 2 percent, “and San Diego will do about the same.”

Every month, Gin compiles the leading indicators of the San Diego economy. They have been creeping up since early 2009, indicating a modest recovery. “In the first couple of months of 2010, the San Diego unemployment rate could approach 11 percent, but then it will start coming down, and I think it may be under 10 percent at the end of the year,” says Gin. “We will have a slight rebound in construction, and tourism and retail jobs will stop falling.”

To get a handle on the local economy, you have to look at what industries provide the most output and employment. According to Kelly Cunningham, economist for the National University System Institute for Policy Research, financial activity accounted for 24.6 percent of the local economy in 2008. That included jobs in the financial industry (stockbrokers, bankers, etc.), insurance, and real estate. The overwhelming portion is in real estate, which in 2008 accounted for 20.1 percent of the entire local economy.

This is a bit scary: San Diego is dominated by real estate. In fact, the two other metro areas that had larger real estate percentages in 2008 were Orlando (24.8 percent) and Miami (20.8 percent). Real estate has collapsed in Florida and California, so those percentages are probably lower today. Last year, San Diego’s real estate, rental, and leasing jobs dropped by around 2 percent.

This year, real estate will be spotty — bad in some categories, good in others. Last year, permits for new single-family homes were dismal. But interest rates and prices have come down sharply. In 2009, single-family permits were around 2000 — “the lowest since World War II,” says Alan Nevin, economist for MarketPointe Realty Advisors. This year, “I would be stunned if it hit 2000,” he says. “There will be no condominiums started, but there could be as many as 1500 apartments. These are projects being built on land meant for condo development.” There are also what Nevin calls “broken projects” — originally intended as condos but now containing both condos and rentals.

With prices having taken a bath, “The resale market is booming,” says Nevin. “The problem is that there is virtually no inventory because owners of homes that are not in trouble are not listing them. We are down to less than a three-month inventory, and typically you would want a six- or seven-month inventory.” Last year, half the sales were foreclosures or so-called short sales, transactions in which the bank agrees to take a hit on the home price. This year, foreclosures and short sales will be about one-third the total, says Nevin. All told, it appears that there won’t be a big gain in real estate jobs this year.

The second-largest sector of the San Diego economy is government — 17 percent. That compares with 13 percent nationally and 12 percent in California. This includes the presence of the military (uniform and nonuniform personnel, for example). These figures do not include money that pours into San Diego in aerospace/ defense contracting, including shipbuilding. However, employment in aerospace manufacturing was off more than 9 percent last year. The county once had much more aerospace contracting and military presence than it does now. From an economic standpoint, I would rather see San Diego be a Navy Town, as it used to be, than a Real Estate Town, which it is now. Once a building is constructed, it doesn’t add much to the economy other than taxes (hopefully). Construction employment has been sinking for some time and last year was down more than 9 percent.

Government employment tends to be steady, and the military contribution should be relatively stable. One of the biggest battles locally is over the extremely generous pay and pensions of government employees. With the City teetering on the brink of financial disaster, many say that government pay and fringes should be slashed. But there are laws protecting the benefits, and politicians don’t want to battle with politically potent government employees.

In the United States and in San Diego, manufacturing has fallen dramatically in the past 50 years, replaced by various kinds of service jobs. In San Diego, business and professional services make up 14 percent of the economy, third highest. This trend is serious because manufacturing jobs tend to have higher wages than service jobs. In the U.S., manufacturing has dropped from 28.3 percent of the economy 50 years ago to 9.25 percent. It’s worse in San Diego — the plunge has been from 27 percent to 7.6 percent over roughly the same period.

From 2001 through 2008, San Diego had one of the fastest-growing economies in the nation, says Cunningham. The major reason was the growth of technology, including biotech. But last year, employment in technology-manufacturing areas such as computers and peripherals, electronic instruments, and audio and visual manufacturing dropped between 3 and 7 percent. “For the first time in a long time, that business was down,” says Gin. “But that will be one of the strongest in 2010, with biotech research and development the strongest.”

Leisure and hospitality services are 4.5 percent of the local economy. Through October of 2009, the total number of visitors to the county was down 5.5 percent from 2008 and down almost 8 percent from the same period of 2006, according to Convention and Visitors Bureau figures. Employment in tourism took a hit last year. Hotels were particularly vulnerable, says La Jolla tourism guru Jerry Morrison. Through November of 2009, occupancy was down 9.7 percent and revenue per available room down 21.1 percent, according to Smith Travel Research. Hotels that were built or refinanced in the past five years are underwater financially, says Morrison. “I’m afraid that 2010 will wind up the same as 2009,” says Morrison.

Response to post #1: I think the U.S. and San Diego will squeak through 2010 with very moderate growth. Look out for the next two or three years after that. I agree that this year, the residential real estate market will reverse its uptrend as Alt-A mortgages default massively. Best, Don Bauder

Don, you note that real estate constitutes 20% of the San Diego economy. Could you elaborate on what types of jobs that includes? I imagine it includes (and is likely dominated by) construction, because I can't imagine there are that many jobs out there in real estate sales, renting, and financing.

Also, Nevin mentions low inventory of homes for sale. Could this be due to lenders holding back on properties that eventually will need to be put on the market? A friend of mine works for a major lender, coordinating sales of homes the lender has repossessed. He claims the firm and its peers are trying to keep prices up by trickling out properties instead of putting everything on the market at once.

Final thought: The $8,000 first-time homebuyer credit is not mentioned in your article, but I've been thinking lately, isn't it really a boon to sellers, not buyers? That is, if all (or many) of the bidders on a home have the credit in their back pocket, doesn't the credit just boost everyone's bids by $8,000? Seems like the seller gets an extra 8 Gs while the winning buyer gets a home whose value has been temporarily boosted by an $8,000 margin that will evaporate once the credit is gone.

Response to post #4: You would think that 20% has to include construction. I tried to clarify it with Kelly Cunningham but he wasn't available at the time. I'll check again. Yes, lenders are holding back properties that should be put on the market. And I am not sure who, if anybody, benefits from the $8,000 first-time homebuyer credit. Both buyer and seller should benefit NOW. But the sales are just borrowed from the future, for the most part. I don't know how many people make a decision to buy based on a credit so small. Best, Don Bauder

If there is a future tidal wave of foreclosures that hit the market, which is a hugely debatable assumption, I think it will affect the pie chart by increasing the "finance" job portion of the pie. Assumed lower prices should increase buyer demand and necessity for jobs to keep the real estate gears moving.

I wonder what this pie should look like. How would it need to look in order to have a more successful future for San Diego? What do other fiscally successful cities pie charts look like?

If there is a future tidal wave of foreclosures that hit the market, which is a hugely debatable assumption,

One more factor contributing to shadow inventory: People are slowly realizing that it's not a sin to walk away from an underwater mortgage (the bank would walk away in a heartbeat if it was in an underwater homeowner's position).

For instance, there's a new article from Roger Lowenstein in NY Times Magazine on the topic. It's title? "Walk away from your mortgage!"

As the stigma surrounding walking away fades, more people will do it - even people who could find a way to make the payments. That'll mean even more homes for sale.

There are something like 15 million underwater mortgages nationwide, with a disproportionate amount in formerly frothy markets like ours.

One more factor contributing to shadow inventory: People are slowly realizing that it's not a sin to walk away from an underwater mortgage (the bank would walk away in a heartbeat if it was in an underwater homeowner's position).

I agree 100%.

I read about a guy that stopped paying and banked the mortgage payment. It lasted 8 months, and when he was foreclosed on and evicted he had a huge nest egg which he used to pay the slightly higher interest rates he was charged.

Response to post #9: Another wave of foreclosures might increase real estate employment, but it would be a close call. The lower prices and rush of homes hitting the market would increase sales jobs. But jobs in new housing would wilt as that part of housing collapsed even more. As to the pie chart, other cities have different distributions. San Diego's government and real estate jobs as a percent of the total pie are higher than that of other cities. Manufacturing is less. Best, Don Bauder

Response to post #11: The Wall Street Journal had a good story, too, on people walking away from homes that are under water, turning the keys back to the bank, and renting a home without a bit of remorse. Best, Don bauder

Manufacturing= 7.6%

I remember about 10, 15 years ago when our manufacturing base was being destroyed by predatory business practices and being shipped overseas, one newspaper author of financial books (forgot who) said that we now almost have more gov employees than employees in manufacturing jobs-and he then cited stats from the 50's when our country was having enormous growth-and manufacturing was like 50% of employment back then, and gov was like 10%.....!!!!!! I wish I could find that article.

Response to post #17: With manufacturing less than 10% of the economy, I would think government employment is a good deal larger than manufacturing employment, and has been for years. Manufacturing never got to 50% of the U.S. economy. It peaked out at something like 32%. Best, Don Bauder

I think the suggestion of comparing allocation pies was to just compare how "healthy" cities compare with "sick" ones as a START on analysis and prognosis, the development of a treatment theory upon which to base treatment, monitoring the patient and the details and interactions of the feedback loops that result, and adjusting the treatment "regimen" accordingly. Even then, their predictive value can be in minus territory.

Of course, such pies, however appetizing, are only one handle on the problem; they don't show histories, nor are they the only analytical tool available; in fact, they can be quite a distraction from the actual dynamics that produce them. And, there is no guarantee that any particular way of slicing or portion control will be sufficiently nutritious or poisonous.

It would be easy to be lead down some primrose path strewn with briars and pitfalls without examining the nutritional balance and palatability that requires constituent analysis (whether the pie is mostly sugar, mostly cheese, apples and oranges, not to mention trace elements, for example, which can upset the apple-cart all out of proportion to the mere quantity).

“The more you generalize about a population, the less you know about any individual in that population.” --Henry Geiger

Response to post #19: Obviously, one pie chart is not going to reveal the whole enchilada (how's that for mixing metaphors!), but Cunningham's chart tells quite a story -- one that should be sobering for San Diegans. A society can't subsist just doing one another's laundry. Best, Don Bauder

Response to post #21: U.S. companies' strategy beginning in the 1980s to move manufacturing offshore to fatten profits and justify outrageous management salaries is one that our society is paying for dearly. Best, Don Bauder

I'm not selling pies short; only suggesting that the commenter might be suggesting that comparisons with other pies (and perhaps their eaters) would be even more revealing of allocation errors, and perhaps hinting that a third dimension to them might exist.

As to the laundry metaphor, it appears that the hustle hierarchy has a cork in it, and doesn't realize that when the golden gooses don't eat, no more golden eggs. That's local, that's global.

Well, just as we can't get by doing each others' laundry, neither can we sustain an economy by building McMansions. By sending jobs, nay, entire industries, "off-shore," the skills associated with them are disappearing/have disappeared. This birthright, this legacy of the blood, sweat, and tears of our fathers and mothers and uncles and grand-relations, has MORE than been sold for a mess of pottage (largely Chinese, but cranked out by millions of other contract- and piecework-slaves worldwide), it has eroded the ATTITUDE of a non-working underclass that aspires to shop for crummier and crummier trinkets at greater and greater "bargains." This attitude was spawned by the insanity of Mad-Ave, just one of the heads that must come off the profit-maximization dragon.

In such a state, any turnaround will be much more painful than any to which we have become accustomed. This is not mere pessimism. Pretty soon, the USA will be another banana republic, aspiring to be as good as Mexico. That is, the generation now in school can look forward, if they can get any work at all, to picking strawberries for the 0.05 percent at the top, who will give even less of a damn than today's hustlers.

I say 0.05 percent because even the lackeys and goons will be a dime a dozen. Have another look at the pie; better yet, plot the trend curve that ended up there from long enough back to chart something resembling stability. An intelligent society should at least have as its CENTRAL goal, the MODULATION of the peaks and valleys that make up that trend line, not a "recovery" to the irrational exuberance that got the economy to the "big enough to fail" level.

Certainly, a sensible person would not look to a turn-of-the-century-style real estate market as a sign of normalcy!

Response to post #23: Your analogy is a good one. Consumers are 70% of the economy. If unemployment stays at 10% nationally this year (and it may well rise), consumers are going to save more and consume less. Long range, that's good; that's how economies recover. Savings rise and consumers enjoy wealth and make discretionary purchases. But there is pain getting from here to there, and our policy makers want to spare us the pain. But they are spending most of their money to bail out the financial system and some industrial concerns such as GM. Best, Don Bauder

Response to post #24: I doubt that anybody now contributing to this blog, no matter how young, will live to see us become a third world country or the equivalent. We have too much momentum, population, resources. But our base is declining -- no argument there. Best, Don Bauder

Yet it is a distinct possibility that we can see our economic prospects become dire, with the already huge gap between rich and poor made even wider. This could lead to the kind of social unrest that either prompts reform -- or tyrany.

Economic historians like Niall Ferguson share this view. It's scary, and we'd rather not face up to it, but the alternative to reforming our system now is having it reformed by force (and not necessarily for the better) in the future.

I walked precincts in 2008 campaigning for change. I was hopeful that democracy had worked, and we'd see some reforms. But in the last year, I've seen nothing to keep me hopeful.

Response to post #27: You make excellent points. In economics, one may believe that something is going to happen. But you don't know when, and don't know how explosively. A case in point is the newspaper business, particularly metro dailies. Decades ago, it was clear that young people were reading with much less frequency than earlier generations, and newspapers were not delivering the news in a timely fashion. But those in the industry still saw a bright future. Copley Press, for example, went into debt to buy newspapers in Ohio and Illinois, when it could have spent the money on technology. Then in the last few years, the online competition escalated quickly, and newspapers sank much more rapidly than even the most pessimistic observers such as myself expected. Copley, for example, paid a company to take the newspaper by selling it $100 million worth of real estate for $50 million. Only five years earlier, the newspaper had been worth $1 billion.

You're absolutely right about the social unrest. For decades, we have watched as salaries of top executives went berserk while the pay of the average worker stagnated. Now, after being rescued by the government, the banks want to go back to paying their top executives $25 million to $100 million or so a year while their depositors get almost nothing for savings and the taxpayers pick up the tab. There is a fire smoldering, and it could turn into a real conflagration. Actually, American workers should have been figuratively storming the Bastille years ago. At some point, they may. And, as you observe, it may happen much more rapidly than we expect now. Best, Don Bauder

The problem with newspapers is that they don't understand their own potential and how they compare with other media. For that matter, other media don't seem to "get it" either. They are used to being in the driver's seat, and the current and future generations want what they want when they want it. They don't understand reader demographics in any depth, only by the SOS, age, race, nationality, and other relatively irrelevant or less relevant factors instead of probing deeply into what people across those categories want and filling that need. The Internet has a ways to go itself, but it is ahead of newspapers. Too bad, because I would pay more for a news source that was better organized, did follow-up and had more consumer columns. I want to read the newspaper at the coffee shop or bus, then be able to quickly locate items of interest on the Internet. I may be part of a small fragment the demographic, but until their analysts learn how to look beyond the surface, the response to their product is going to continue to reflect more error than innovation.

Response to post #29: I agree that newspapers are used to dictating what's news to their audience, and don't listen enough to find what readers want. That is one of many things that got newspapers, particularly metro dailies, into such deep trouble. The same mentality hurt magazines. One advantage newspapers have is a large news-gathering organization. The ability to gather and interpret the news is there. It has to be utilized intelligently. Best, Don Bauder

One of the reasons that virtually nobody expects 2010 to be a banner stock market year is because nobody can see anything worth investing in.

Right now, everything about government and industry is about reaction, not action. Nobody is actively engaged in thinking about what America could be like at the end of this next decade, much less the end of this century.

The industrialists of the 19th century had their own dream, to build America from the ground up. This meant iron and coal mines, railroads from sea to sea, skyscrapers, and the like. It was the kind of America that was able to absorb the new technologies of the early 20th century: electric lights, phonographs, primitive airplanes and the Model T. Because we were fairly self-reliant and adaptive, we withstood the worst of the Great Depression after aiding Europe in World War I, and then became the world's leading superpower with nuclear weapons by the end of World War II.

Surely, there was greed in 19th century industrialism and afterward, but it was the kind of greed understanding that if you had to screw everyone else over all the time, pretty soon there would be no market left to exist in, and that's definitely not a conservative value.

I'm not saying the hippie movement of the 1960s destroyed the ideal of America, but there have been significant and not altogether positive sociological consequences to things that we did in that decade and later, mostly without thought as to unintended and undesirable consequences. So far, nobody has been able to replace Scouting as a socializing influence in modern society, sacrificed on the altar of Political Correctness without thought as to how to integrate teenagers as young men and women in society. The result? We now are nationally known for the Bird Rock Bandits AKA the La Jolla Wet Bandits.

What this country desperately needs is leadership from the top that is not reactive to crises but actively moving this country into a safer and more prosperous future for ourselves and our posterity. It won't happen as long as the only thing our posterity can count on tomorrow is picking up the rather substantial tab for our short-sighted market and government-program foolishness of today.

Greed by fiscal quarters embodied in corporate arrogance either gives way to Americans in service to other Americans to improve ourselves over time, or we end up losing it all.

Response to post #31: I think stocks will go up this year, although the economy will be lousy. Because of the weak economy and high unemployment, the Fed will keep lending to the banks at zero percent or close to it. Ditto for other central banks in the world. Money will be sloshing around. That's what happened last year: stocks, bonds and commodities all went up because of the massive liquidity. It will happen again this year, I think, (although bonds may bow out of the parade during the year.) The central banks around the world can't go on giving away money to their member banks forever. I think 2011 may well be the year when it begins coming down again. Perhaps hard. The economies aren't growing. This is all a money mirage.

I agree: we need leadership from the top. I thought we would get some with Obama. Thus far, I am disappointed. Best, Don Bauder

I agree with Post #31, in that the old social contract that ushered us through the 50's and set the stage for some real prosperity in the 60's has been broken. Could a real leader resurrect that sort of deal? I think it could be brought back in an updated form. The business world has to be convinced that every job outsourced is a customer eliminated. So far that is not totally obvious. Will we need to suffer a stagnant economy for a decade or more to make that obvious? I would have loved to see Clinton use the bully pulpit to talk corporations out of the massive downsizing of the early 90's. I would have loved to see Dubya do the same sort of thing against the backdrop of 9/11, but all we got from him was advice to spend and spend more on consumption. The message from this administration is incoherence.

Response to post #33: We're a nation of money changers. Manufacturing has gone from 30% of the economy to below 10% while financial activities have climbed from 10% to above 20%. Much if not most of this financial activity is non-productive or counter-productive. But the big pay packages are in the financial realm that is just shuffling money. Best, Don Bauder

The license plate story is old hat. It just adds to the how public sector "employees" get more pay, benefits, golden pensions, and are nearly impossible to fire.

The worst news is the fact that these same pampered incompetents are now a major political force, openly demanding that politicians grant them additional special privilages, gaming the system, influencing elections and legislation, practically putting themselves above the law.

And at this point, they've so entrenched themselves and their cronies in positions of power that it's beyond the power of democracy to do anything about it. No amount of money or votes can challenge this cabal which takes our money to run our lives while making themselves exempt from oversight.

It's not just oligarchy, or kleptocracy...I'm not even sure there is a word for it.

Yet simultaneously they convince gullible (and often ill-educated) reporters that they are underpaid and overworked and oh-so-valiant to take a lowly public sector job...

Response to post #38: Yes, they have power both on the state and certainly on the local (particularly San Diego) levels. I would be interested hearing your views, Fred, on the power of the prison employees' union in California, and how it has distorted societal priorities. Best, Don Bauder

I've known Mr. Williams for a number of years back in the late 1980s. I am hoping that he can appreciate what is said and not said in the State of the City address tonight.

If that speech goes not the way I would hope it would go -- with the mayor failing to identify one of the great open sewer drains on our local economy that hasn't been publicly addressed since before I (a 50+ old guy) was in high school -- then it is my hope that Mr. Williams and others with at least some experience in public governance by legislative bodies are able to open everyone's eyes, in the same ways that eyes were opened to the very interesting article that he mentioned above.

The reason why all of our best and brightest can't all be in government at the same time is because none of us can trust it without some of the best and brightest being watchful over what the government does... from the outside looking in.

The power of the prison-industrial complex is well-known to insiders. If I'm not mistaken, they're the top political campaign contributors in the state. This explains their fat salaries, continued expansion of jails, advocacy for longer sentencing, and so on...

I won't be listening to the State of the City address. I don't have to hear the toilet flushing to know that the crap is spiralling down the pipes...

A2Z knows that I've been following this stuff for over two decades, and I've met a lot of the people running this town. I was offered the chance to join them...and turned it down. I'd rather turn tricks on El Cajon Blvd than prostitute myself politically.

As a result, I don't have the money or power of the clowns downtown, but at least I have my dignity and self-respect...and the freedom to tell the truth about what's really going on in San Diego.

Response to post #41: Yeah, but the clowns downtown don't even know they lack dignity and self-respect. That's what being obsessed with money is all about. Some say it falls into the sociopathy categories. Best, Don Bauder

Dang. I posted my own idiot blog before I saw the invite. For the life of me, I don't know why it's appearing a a front-page news story...

I've had to stand at attention a whole lotta times while this minister of state or that military chief arrived or departed the District of Columbia, sometimes watching fellow Old Guardsmen eat pavement from locking their knees during somebody's speech... and I never had to wait as long as I did during Hueso's formal greetings to all of the assembled non-heads of state before the State of the City address...

Most annoying part of speech: After all the hoopla at the beginning of the mayor's administration about finding out things on every city contract, no mention was made of the SDG&E franchise fee, still set at the 1970 low of 3% a year... even after wildfires that we may still have more of.

The City is so hard up for cash that they charged the Thursday Club, which donates thousands to cultural organizations, an outrageous sum for building rental for this year's rummage sale. Gloria was at the event mugging for the cameras, but the ladies are trying to quietly and nicely get the policy changed for next year. They don't want to make waves, but it would be interesting to know where such a decision came from in the chain of command. If SOP's are used, the upper chain will cover itself by blaming the lowest functionary for his/her "error," even to the point of firing if the situation gets out of hand. It gets curiouser and curiouser here in 3-D Wonderland, don't it? Don’t reveal your sources, ok?

Twister, the Thursday Club is not being singled out. It used to be that certain public facilities could be used free of cost by non-profit organizations, but that is no longer the case. Now everybody has to pay fees, though non-profits pay substantially less than for-profits. You can call the Park and Recreation Department and they will forward you the fee schedule and policies, and when they went into effect.